Breakingviews - Macquarie shape-shifts into lucrative green niche

The logo of Australia's biggest investment bank Macquarie Group Ltd adorns a desk in the reception area of their Sydney office headquarters in Australia, October 28, 2016. REUTERS/David Gray

HONG KONG (Reuters Breakingviews) - Macquarie is one of finance’s inveterate shapeshifters. For its next act, the $30 billion Australian investment bank’s newish boss, Shemara Wikramanayake, is betting on wind farms and the like. With fewer constraints than Wall Street rivals and plenty of experience, Macquarie is well placed to benefit as the global economy moves away from fossil fuels and adapts to a changing climate. A greener book, though, also brings new risks.

Macquarie is keeping up an impressive pace. First-half earnings rose 11% from a year ago, a little better than signalled. Asset management fees and client hedging in commodities, particularly gold, helped offset a drop in more traditional investment banking income. But the bank stuck to its conservative prediction for weaker overall performance this year, sending its shares – up by roughly a fifth so far this year - a little lower.

Macquarie’s success in recent years has been helped by astute investments made during the financial crisis. As many of those mature, looking to develop renewable projects looks reasonable. Under Wikramanayake, who took the helm last year, Macquarie has not stopped hunting for rewarding niches. That’s now green energy, part of the motivation for a bumper capital raising in August.

There’s also an unquestionable need for new investment as major economies look towards more sustainable sources of energy, alongside investor appetite. Macquarie can also avoid developed assets, where demand from investors has pushed down returns, by coming in early. It has firepower, experience in spotting opportunities in regions like Southeast Asia, and hard-to-replicate ties to both suppliers and eventual buyers. It also bought a specialist outfit, the Green Investment Bank, from the UK government in 2017.

Macquarie more than doubled its money in Quadrant Energy when it sold the business to Santos last year, UBS reckons. Developing wind farms and solar projects can be lucrative too. But it’s also riskier, and with average holding periods of roughly two years, requires Macquarie to constantly generate new projects.

For the moment, green energy makes up just A$1 billion of Macquarie’s A$8.5 billion equity investment portfolio. If Wikramanayake can morph Macquarie the way her predecessors have done, look for that to change.

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